SBA shatters loan record, but needs more money soon

With one week to go in its fiscal year, the Small Business Administration had approved more than $19 billion in loans through its flagship 7(a) program.

That’s a new record for the agency, topping the $15.2 billion in 7(a) loans that were approved in fiscal 2005.

Not all small businesses that were approved for government-guaranteed SBA loans decide to go through with them. That’s good, since the SBA is only authorized to make $17.5 billion a year in 7(a) loans. Counting cancellations, the net amount of 7(a) lending this fiscal year stood at $16.9 billion with one week to go. SBA spokesman Mike Stamler said the agency should be able to make it to Sept. 30 without hitting the $17.5 billion cap.

“We’re going to cut it close,” he said.

The SBA experienced “a bit of a surge” in 7(a) loan approvals the week of Sept. 19 because lenders want to get their loans done this fiscal year. A similar surge was expected during the week of Sept. 26. That’s because SBA lenders know they have the authority to do $17.5 billion in 7(a) loans this year — and federal funds have been appropriated to support this level of lending. They don’t know how much money will be available for SBA lending next fiscal year, which begins Oct. 1.

Congress is expected to approve a short-term bill by Sept. 30 that would fund the SBA and most other government programs at their current levels. Otherwise, the SBA and other federal agencies would be forced to shut down.

Defaults require higher subsidy

After a few months, however, the SBA would need funding beyond its current level in order to maintain its robust pace of lending. That’s because of higher default rates on 7(a) loans made in 2006, 2007 and 2008. When loan defaults increase, the added cost to the federal government must be paid for either by taxpayers or by SBA lenders and borrowers.

Appropriators in both the House and Senate approved an increase in next year’s federal subsidy for the SBA’s 7(a) and 504 loans — which are used primarily for real estate — from $80 million to $211.6 million. This would enable the SBA to keep both loan programs at their maximum size without having to raise fees on borrowers or lenders.

“I don’t think anybody out there thinks this is the time to be raising fees,” said Tony Wilkinson, president and CEO of the National Association of Government Guaranteed Lenders.

Like other fiscal 2012 appropriations bills, however, legislation funding the SBA has not yet been passed by Congress and signed by the president. That’s why Congress needed to pass a short-term bill by Sept. 30 to keep the government running.

Wilkinson hopes Congress will pass a full-year funding bill, with an increased subsidy for SBA lending, in the next couple of months. If it doesn’t, he hopes Congress will make an exception for the SBA in future short-term funding bills and provide it with extra funding.

Congress could solve the funding problem for SBA loans by increasing fees, but that’s unlikely and would be counterproductive, he said. Congress shouldn’t look at SBA loan fees until the 2013 budget process, Wilkinson said, because loan defaults have peaked and the SBA now is collecting more revenue from loan fees because SBA loans are getting larger. Combined, these two trends should lead to a lower subsidy rate for SBA loans in 2013.

Given the bipartisan support for increasing the federal subsidy for SBA loans next year, Wilkinson is optimistic Congress will provide this money. Without it, the SBA eventually would have to cap the size of its loans or take other steps to stretch its loan dollars. That would be bad news since the SBA “is the only place for small businesses to get financed right now,” Wilkinson said.

“When the economy gets tough, that’s when small businesses really turn to the SBA,” said Molly Brogan, vice president of the National Small Business Association.

Small Business Lending Fund expires

One program designed to boost lending to small businesses expired Sept. 27, without coming close to hitting its target. Congress created the Small Business Lending Fund to provide up to $30 billion in cheap capital to community banks for use in making small business loans.

Instead, the SBLF will end up providing only about $4 billion in capital to around 300 community banks, estimates Paul Merski, executive vice president and chief economist for the Independent Community Bankers of America. That’s not insignificant, he said, since banks can leverage this $4 billion in capital into $40 billion of small business loans — lending that otherwise would not have occurred.

Community bankers, however, were frustrated by how this program was implemented, Merski said. It got off to a slow start, and the Treasury Department and banking regulators put too many obstacles in the way of banks who wanted this capital, he said.

“We really wanted that capital flowing out to more institutions,” Merski said.

The poor state of the economy also had something to do with the SBLF’s lackluster results. To get this capital, banks had to submit plans on how they would increase lending to small businesses. They can only do that if there’s enough demand for loans from creditworthy businesses.